This paper seeks to identify the major factors behind the innovation process of firms in the food and beverage sector. At first, we tried to identify which sub-sectors within the food and beverage sector are more innovative than the others, and the role of different explanatory factors, including firms’ size, schooling, and firms’ innovative effort. On the microeconomic incentives to innovate, our results show that larger firms, higher schooling and higher R&D expenditures increase the probability that firms will innovate. In addition, our results show that innovation is essential for food and beverage firms to meet the domestic demand, including the upper segment of the consumer market and also the bottom one. At last, our results indicate that the domestic consumer was a key factor behind food and beverage firms’ incentives to innovate in the 1998- 2000 period.